China’s Smaller Cities Are Home to Growing Middle Class

Last week Chen Demin, China's commerce minister, offered an upbeat outlook for China's overall 2013 economy, forecasting steady improvement in domestic consumption and investment, and predicting that foreign direct investment over the coming year would also remain stable. In his remarks, Chen emphasized that foreign investors should look favorably upon the opportunities in China, notably those connected to China's construction of many new small and medium-sized cities and towns.

We agree. Robust new construction in China and a soaring rate of urbanization promise unprecedented levels of consumption and overall GDP growth that should only invite greater confidence among foreign investors.

As we stress in The $10 Trillion Dollar Prize, urbanization is one of the most powerful transformative economic forces in China today. According to the National Bureau of Statistics of China, 51 per cent of China's population, or 691 million people, are currently living in urban areas. Research suggests that by 2020, some 824 million people will be living in cities, an increase of 188 million. That's one and a half million new urban residents every month for the rest of this decade. By 2030, according to our analysis, there will be around 270 million more new urban residents in China.

But the distribution of China's urban population is vastly different from that of many other nations, with the majority of that population located in midsize cities ranging between 500,000 and 5 million people.

Typically, and perhaps not surprisingly, U.S. and European companies entering China have focused on the cities of Beijing, Shanghai, and Guangzhou. But we tell them that this is a mistake. There are pockets of wealth all across the country, and the wealth is spreading deep into the country's western provinces.

By our calculations, a company had to be in 60 cities to reach 80 percent of the country's middle class in 2005. Today, they have to be in 340 of them. And by 2020, they will need to be in 550 urban locations to reach that same percentage of the middle class population.

We regroup the cities of China into a series of four categories, including megacities, cluster capitals, specialist hubs, and horizon towns, as follows:

  • Megacities. China boasts two megacities — Beijing and Shanghai — each with more than 10 million residents. There are also eight cities with more than 10 million people, and another 93 cities with more than 5 million people. To put this into context, the U.S. has only one city with more than 5 million people — New York.
  • Cluster Capitals. These include Changshu, Daqing, Dongguan, Fuzhou, Tianjin, Wuxi, and Zhengzhou. These are trade hubs surrounded by smaller "satellite" cities. Wuxi, for example, is the capital of a group of six cities within a 30-mile radius in Jiangsu province: Jingjiang, Zhangjiangang, Changshu, Jiangyin, Changzhou, and Suzhou. On its own, Wuxi has a population of 2.3 million people, including 572,000 middle class consumers. Treated as part of a cluster, however, it becomes the center of a market with 6.9 million people and 1.5 million middle class consumers.
  • Specialist hubs. These are cities whose growth is often closely linked to the development of local natural resources or industrial hubs. These include Anyang, Bozhou, Chengdu, Lu'an, Suizhou, Xinxiang, and Yongzhou.
  • Horizon towns. Finally, there are also hundreds of small, geographically dispersed emerging-market cities. Although hard to reach, they offer ripe market opportunities — consumers in these towns usually have more basic needs than those of their counterparts in the bigger cities, but they also have a strong willingness selectively to "trade up" to pricier luxury goods.

And take note of one other very promising related trend: as reported by The Wall Street Journal last month, China's droves of migrant workers (reportedly 252 million strong in 2011) who journey from the country's remote rural areas into cities to offer their labor to construction and manufacturing firms are increasingly remaining in those cities for longer periods of time. If this phenomenon continues — and especially if China's new government relaxes the household registration policy (known as "hukou") that for years has forbidden workers from taking advantage of local benefits (including schools for their children) — these workers will constitute an ever more powerful new urban work force, and a formidable contingent of newly affluent consumers. As they are permitted to participate in the local social welfare system of the cities where they've relocated, these workers will feel less pressured to save every yuan they earn. They will feel newly emboldened to spend their income on a broad range of products and services, contributing to what we believe will amount to some $6.2 trillion in annual consumer spending in China by 2020. And that's a potential milestone that few foreign investors should ignore.

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